1994-96 Advisory Council Report


Actuarial balance. The difference between the summarized income rate for the Social Security trust funds and the summarized cost rate over a given valuation period.

Actuarial costs. The cost of a given change in the program, generally expressed as a percentage of taxable payroll.

Actuarial reduction. The reduction in benefits applicable to beneficiaries who begin to receive them before normal retirement age (currently age 65). The reduction is designed so that, on average, a person will receive the same total lifetime benefits regardless of whether they begin at normal retirement age or an earlier age. Consequently, the reduction in benefits results in no long-range cost to the program.

AIME. Average indexed monthly earnings. The amount of earnings used in determining the primary insurance amount (PIA) under the Social Security program for most workers who attain age 62, become disabled, or die after 1978. A worker's actual past earnings are adjusted by changes in the "average wage index", in order to bring them up to their approximate equivalent value at the time of retirement or other eligibility for benefits.

Assumptions. Values relating to future trends in certain key factors which affect the balance in the trust funds. Demographic assumptions include fertility, mortality, net immigration, marriage, divorce, retirement patterns, disability incidence and termination rates, and changes in the labor force. Economic assumptions include unemployment, average earnings, inflation, interest rates, and productivity.

Average wage index. The average amount of total wages for each year after 1950, including wages in noncovered employment and wages in covered employment in excess of the OASDI contribution and benefit base.

Basis point. A portion of the annual yield for an investment equal to 1/100 of 1 percent of the yield. One hundred basis points is equal to 1.0 percent. (If the administrative cost for a given investment were equal to 100 basis points, the annual yield would be reduced by 1 percentage point.)

Bendpoints. The dollar amounts defining the average monthly earnings or AIME brackets in the Social Security benefit formula.

Benefit formula. The formula for computing a worker's Social Security primary benefit. Under current law, a three-step weighted benefit formula is applied to a worker's average indexed monthly earnings (AIME). For workers reaching age 62 in 1996, the formula is:

90% of the first $437 of AIME; plus
32% of AIME in excess of $437 and up to $2,635; plus
15% of AIME in excess of $2,635.

Computation period. The period over which a worker's earnings are averaged for purposes of computing Social Security benefits. (Generally, the computation period is 35 years for retired worker's benefits).

Consumer price index. An index prepared and published by the Bureau of Labor Statistics of the Department of Labor which measures average changes in prices of goods and services.

Contingency reserve. A reserve level in the trust funds that is adequate to provide a safeguard against downturns in the economy.

Cost-of-living adjustment (COLA). Periodic increases in benefits to reflect increases in the Consumer Price Index.

Delayed retirement credits. A credit due a worker for retirement beyond normal retirement age. These credits, currently 5.0perce nt of the benefit (for workers who attain age65 in 1996-1997), take account of benefits foregone by people who continue to work or otherwise delay their receipt of worker=s benefits past normal retirement age. The delayed retirement will gradually rise from the current 5.0percent per year to 8percent per year for workers who reach age 66 in and after 2009.

Equities. Shares of corporate capital (stocks).

Explicit and dedicated payroll taxes. Social Security taxes on earnings covered under the Social Security program.

Fertility rate. The average number of children that would be born to a woman in her lifetime if she were to experience the birth rates by age observed or assumed for the selected year, and if she were to survive the entire child-bearing period.

Fully-funded financing. A financing scheme where taxes or contributions are established to match the full cost of future benefits as these costs are incurred through current service.

Gross domestic product. The total dollar value of all final goods and services produced by labor and property located in the United States, regardless of who supplies the labor or property.

Indexed Treasury bonds. An inflation-adjusted bond issued to the public by the Federal government. The face value of the bond would increase with annual inflation and the interest rate would apply to the inflation-adjusted nominal amount.

Life expectancy. The average number of years in life remaining for a person if that person were to experience the death rates by age observed in, or assumed for, the selected year.

Means testing. Making receipt of benefits contingent upon having income and/or assets under a certain level.

Money's worth ratio. The ratio of the present value of expected benefits to the present value of expected taxes paid by the employee and the employer on behalf of the employee.

National savings. The aggregate public and private savings in the United States.

Normal retirement age. The age of eligibility for unreduced Social Security retirement benefits, currently age 65. Under current law, normal retirement age will be increased gradually from age65 to age67, beginning with workers who reach age62 in 2000. The normal retirement age is scheduled to reach 67 for workers attaining that age in 2027.

Old-age and survivors insurance benefits. Monthly Social Security benefit payable from the OASI Trust Fund--e.g., benefits for retired workers and their spouses and children and to survivors of deceases workers.

Partial reserve financing. A financing scheme where taxes are scheduled to provide a substantial accumulation of trust fund assets, thereby generating additional interest income to the trust funds and reducing the need for payroll tax increases in periods when costs are relatively high. (Higher general taxes or additional borrowing may be required, however, to support the payment of such interest.) While substantial, the trust fund build-up under partial advance funding is much smaller than it would be with full advance funding.

Pay-as-you-go financing. A financing scheme where taxes are scheduled to produce just as much income as required to pay current benefits, with trust fund assets built up only to the extent needed to prevent exhaustion of the fund by economic fluctuations.

Present value. The equivalent value, at the present time, of a future stream of payments (either income or expenditures). The present value of a future stream of payments may be thought of as the lump-sum amount that, if invested today, together with interest earnings would be just enough to meet each of the payments as they fell due. At the time of the last payment, the invested fund would be exactly zero.

Primary insurance amount (PIA). The amount on which all monthly Social Security cash benefits are based. A worker=s PIA is derived from his average indexed monthly earnings under Social Security. A worker=s disability benefit or old-age benefit at normal retirement age (currently 65) is equal to 100 percent of his PIA. Eligible dependents and survivors get benefits equal to various percentages of the worker=s PIA.

Real rate of return. The return after the effects of projected inflation have been taken out.

Real interest rates. Rate of interest after discounting inflation.

Real wage increase/differential. The difference between the percentage increases in (1) the average annual wage in covered employment under the Social Security program and (2) the average annual consumer price index.

Replacement ratio. The percentage of a worker's earnings that are replaced by Social Security benefits.

Retirement earnings test. The provision requiring withholding of Social Security benefits if beneficiaries under age 70 have earnings in excess of certain exempt amounts (for 1996, $8,280 for beneficiaries under age 65 and $12,500 for beneficiaries age 65-69). The amount is automatically adjusted each year based on increases in average wages in the economy. Benefits of persons under normal retirement age are reduced $1 for each $2 of earnings over the applicable annual exempt amount. Benefits of persons normal retirement age through age69 are reduced $1 for each $3 of earnings over the applicable exempt amount.

Stochastic simulations. A modeling technique that employs probability distributions rather than point estimates of the possible future trends to derive potential future outcomes. It allows for correlations between combinations of assumptions and can be used also to narrow the most likely future outcomes.

Summarized cost rate. The ratio of the present value of expenditures to the present value of the taxable payroll for the years in a given period.
Summarized income rate. The ratio of the present value of tax income to the present value of taxable payroll for the years in a given period.

Trust fund. Four separate accounts in the United States Treasury in which are deposited the equivalent of taxes received under the Federal Insurance Contributions Act, the Self-Employment Contributions Act, contributions resulting from coverage of State and local government employees; any sums received under the financial interchange with the railroad retirement account, voluntary hospital and medical insurance premiums, and transfers of Federal general revenues. The trust funds are:

o The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays monthly benefits to retired workers and their spouses and children and to survivors of deceased workers.

o The Disability Insurance (DI) Trust Fund, which pays monthly benefits to disabled workers and their spouses and children and pays for rehabilitation services for the disabled.

o The Hospital Insurance (HI) Trust Fund, which pays part of the costs of inpatient hospital services and related posthospital care for aged and disabled individuals.

o The Supplementary Medical Insurance (SMI) Trust Fund, which pays part of the costs of physicians' services, outpatient hospital services, and other related medical and health services for voluntary insured aged and disabled individuals.

Valuation period. A period of years which is considered as a unit for purposes of calculating the financial status of a trust fund.

Wage base. The maximum amount of earnings which can be taxed and credited for Social Security purposes in a year. ($62,700 for 1996).

Wage growth. The year-to-year increase in national average wages, either expressed in real terms (i.e., discounted for inflation) or in nominal terms.